Should you take out a mortgage if you can buy in cash?

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Younginvestor93

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If an individual wants to buy a house for €300,000, should they buy the house in cash if they have it saved?

Or should they take out a small mortgage even if they have the 300k on deposit and use the mortgage money and invest the rest?

Or say they have 200k ready to go but need a 100k, should they take out a mortgage of 100k from the bank or get a cash gift from their parents and then buy the house in cash.

Might guess here, is the best option is to go with the 200k cash get a 100k mortgage from the bank and invest the other 100k to get a better return than the interest on the mortgage.

Don't get money from your parents as this would lower the inheritance tax allowable of €335,000.

Is this right or I am way off?
 
Younginvestor93 said:
invest the other 100k to get a better return than the interest on the mortgage.
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Yep, that's why banks are going to stop giving mortgages, and instead invest it all in the stock market...

There's a risk associated with investing. There's also tax to pay. For most people, the after tax returns on investment don't compensate for the risk over mortgage interest rates. Remember interest saving on mortgage is a guaranteed, risk free tax free return.

Plus, most people who can buy a house with cash will have decent enough pension pots, so will already have an equity exposure.

If you had a 0.65% tracker, it might be a different conversation.

Younginvestor93 said:
Don't get money from your parents as this would lower the inheritance tax allowable of €335,000.
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I don't understand this logic.
It's a lifetime allowance. 100k now is better than 100k in 50 years time.
 
If you have spare cash and you don't use it to buy the house, you are effectively borrowing money (at the interest rate of the mortgage) to invest it.

So the after-tax return of your investment should be higher than the interest rate you are paying on your mortgage to not lose money.

But that is not taking risk into the equation. Paying off the mortgage (or borrowing less) is risk free, while investing is not.
Personally I would sleep better on a paid off house.
 
There's an argument for a small mortgage even if you don't need it:
  1. in the very long term equities have outperformed the savings you would make on mortgage interest rates. If you are 25 you might still be drawing on your pension in 60 years. There is always an argument for some equities in your portfolio;
  2. It's easier to get a mortgage at time of house purchase than afterwards in my experience. Borrowing for renovations is a hassle, and you might want to have cash on hand;
  3. Fixing for the max of ten years at a time of very low interest rates might look great in hindsight if inflation and interest rates shoot up in coming years, but this is a gamble;
But all of this is very contingent on your age and income, and whether you are already making tax-relieved pension contributions.
 
No one ever complained about having too little debt. If you can buy a property with cash, I would do it every day. They key is to make sure that you save the mortgage payment instead and use it to grow you wealth.

I echo what has been said about getting the inheritance now. €100,000 is worth more today than it will be in the future. And its not as if the thresholds have been increasing every year. If there is an opportunity to access it now, I would do that and have no debt.


Steven
www.bluewaterfp.ie
 
NoRegretsCoyote said:
It's easier to get a mortgage at time of house purchase than afterwards in my experience. Borrowing for renovations is a hassle, and you might want to have cash on hand;
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This is the a good reason why you might take out a mortgage now when you don't need to. But it would only be relevant if you are about to make the renovations in the very short term i.e. within about two years. But from the sounds of the original question, he would have access to cash to make any such renovations.

Brendan
 
There are plenty of threads where the inverse of this question is asked:

"I have cash - should I pay off my mortgage or make pension contributions?"

So I am surprised that this aspect of it has not been discussed other than Red's reference to it.


RedOnion said:
Plus, most people who can buy a house with cash will have decent enough pension pots, so will already have an equity exposure.
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So, OP, if it's not a theoretical question, you should fill in the following information:

Key Post - Basic information required for the "Money Makeover" forum

It can be difficult, but please try to use a meaningful title in your thread For example "27 year old with mortgage arrears". You will get a much better and much more coherent answer if you give as much information as possible in your first post. For example, if you give your mortgage rate, it...
www.askaboutmoney.com

In short, you should be maxing your pension contributions to use up any of the 40% tax band.

If you can do this and buy the house with cash, then buy with cash.

If you can make hefty pension contributions and buy the house with cash, then do so, even if you are not maxing them.

If buying the house with cash means that you can't afford to make pension contributions, then take out a mortgage. Having said that, this would be an unlikely scenario - as if you are paying 40% tax and have no mortgage, you should be able to make decent pension contributions.

Brendan
 
NoRegretsCoyote said:
in the very long term equities have outperformed the savings you would make on mortgage interest rates. If you are 25 you might still be drawing on your pension in 60 years. There is always an argument for some equities in your portfolio;
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That's not really true though is it? Were mortgage interest rates not 10-15% through most of the 70s-mid 90s in Ireland? Were equites returning 20-30% just to break even on the mortgage?

NoRegretsCoyote said:
Fixing for the max of ten years at a time of very low interest rates might look great in hindsight if inflation and interest rates shoot up in coming years, but this is a gamble;
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Fixing at 0% (no mortgage) would also look like a great move regardless of where rates go

Younginvestor93 said:
Might guess here, is the best option is to go with the 200k cash get a 100k mortgage from the bank and invest the other 100k to get a better return than the interest on the mortgage
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How much do you expect to gain as a percentage? It is a bad idea but if there was any chance of doing it, you would need the security of a 7-10 year fixed mortgage. You cannot depend on short term fixed rates staying low. We can hope that they will and hope they go lower but I wouldn't be investing on that wish. Apart from Avant's 7yr, all other 7/10 year rates are 2.8-3.3% so depending on what you get, you would need a real return of 6-7% just to match the mortgage rate. How much above 7% do you think you will get to justify the risk?

If you can buy in cash now then do so. You will have no monthly mortgage commitment so you use all of your excess cashflow from future income to build your investment portfolio

Younginvestor93 said:
Don't get money from your parents as this would lower the inheritance tax allowable of €335,000.

Is this right or I am way off?
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You are way off ;). Take it now if they can afford to give it to you. It's a lifetime limit, it would have a more meaningful impact on your financial future. Your parents could live well into their 90's so while an inheritance is always good to receive, it would not have a huge impact on your life if you get it at 60-70. In fact you would most likely want to pass it straight on to your own kids at that time.

The only reasons to take that small mortgage is
  • if it helps you max your tax relieved pension contributions for last year, this year and a few subsequent years or
  • if the house needs work on top of the purchase price, it makes sense to cover this with a small mortgage at 2-3% rather than a personal loan at 6-8%.
 
Might I suggest the answer is a little of both. Let's not forget cashback offers make for another incentive to max out borrowings today and pay it all off tomorrow. By technically borrowing and instantly paying back you'll be up 1.6% (2% cashback * 80%ltv) less legal fees.
 
Another option is to buy a more expensive house using the 300k AND a mortgage, which potentially gives you larger capital gains on the property over time, which is tax tree if it's your primary residence.

I personally dislike debt so would not do this, but I do guess there's an outcome where it ends up being the optimal choice in the long run.
 
skrooge said:
Might I suggest the answer is a little of both. Let's not forget cashback offers make for another incentive to max out borrowings today and pay it all off tomorrow. By technically borrowing and instantly paying back you'll be up 1.6% (2% cashback * 80%ltv) less legal fees.
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You would also have to go through all the time and effort of applying for a mortgage. The OP is self employed and is taxed at 20%, so income is relatively low. He will have to submit 3 years accounts to get a mortgage. The cost of the hassle would have to be factored in when considering doing this. He also wouldn't qualify for an 80% income based on income, so after legal fees, he will clear a few hundred. Not worth the hassle.


Steven
www.bluewaterfp.ie
 
_OkGo_ said:
Were mortgage interest rates not 10-15% through most of the 70s-mid 90s in Ireland?
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If you eyeball the series in Figure 5 here you see an average of about 11% from 1970-1990. The S&P 500 returned 11% with dividends re-invested over the same period. I don't think an implicit tax-free return is the relevant benchmark, as what I am proposing is a tax-relieved pension contribution. So about the same, although US inflation was lower too.


I looked as far back as I could with public data to compare like with like. The US 30-year mortgage rate has averaged 7.9% since 1971, while annualised S&P return with re-invested dividends has averaged 10.8%. That's a 3pp equity premium. Yes, you had to wait a very long time, and there were swings along the way, but it is there.


_OkGo_ said:
Fixing at 0% (no mortgage) would also look like a great move regardless of where rates go
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Suppose there is some big upward move in inflation and nominal rates, say policy rates at 3% and inflation at 5%. In this case you are financing your portfolio at a subsidy.

I don't think this scenario is very likely myself, but I wouldn't rule it out.
 
NoRegretsCoyote said:
If you eyeball the series in Figure 5 here you see an average of about 11% from 1970-1990. The S&P 500 returned 11% with dividends re-invested over the same period. I don't think an implicit tax-free return is the relevant benchmark, as what I am proposing is a tax-relieved pension contribution. So about the same, although US inflation was lower too.
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Yes, that's fair enough if using a pension and fully tax relieved at 40% and preferably some level of matching employer contribution.

While many of the OP's questions are hypothetical, they have previously stated that they are 27 (15% tax relieved contribution), self employed, earning less than €35k (20% tax band) and contributing to a PRSA with 95% allocation rate and 1.25% AMR. In this scenario, they can only contribute the following:

€35000 - Salary
€5250 - Pension Contribution (15% of salary)
€4200 - Net Pension contribution (tax relief)
€5000 - Pension contribution @95% allocation rate

If OP borrowed €100k, their only option would be to invest most of it outside of a pension making it a terrible idea. In my opinion, the low income and 95% allocation rate do not make it worthwhile for the OP to borrow that much money to invest in their pension.

I think the issue here is that the OP is asking too many hypotheticals and possibly coming to the wrong conclusions regarding their own finances. They would be much better served doing a factual moneymaker as Brendan has suggested
 
NoRegretsCoyote said:
There's an argument for a small mortgage even if you don't need it:
  1. in the very long term equities have outperformed the savings you would make on mortgage interest rates. If you are 25 you might still be drawing on your pension in 60 years. There is always an argument for some equities in your portfolio;
  2. It's easier to get a mortgage at time of house purchase than afterwards in my experience. Borrowing for renovations is a hassle, and you might want to have cash on hand;
  3. Fixing for the max of ten years at a time of very low interest rates might look great in hindsight if inflation and interest rates shoot up in coming years, but this is a gamble;
But all of this is very contingent on your age and income, and whether you are already making tax-relieved pension contributions.
Click to expand...

^^^For those in any doubt (and still reading) my above post compares the cost of a mortgage with long-term equity performance inside the framework of a tax-relieved pension^^^
 
Something not mentioned yet is the negotiation power that being a cash buyer can bring in some scenarios.
I've often see seller's accept a lower offer from someone who can close quickly. Or someone who can offer flexibility with closing dates.
Plus, you can look at houses (there's risk involved!) that might be difficult to mortgage; e.g. houses with planning irregularities, title issues, or unfinished houses.
Depending on circumstances, these can far outweigh cashback offers. But every scenario is different.
 
At the moment equity markets are over inflated for various reasons. On the other hand interest rates are low. If I had 300K, I would keep around 50K cash (rainy day + avoid small loans for cars, holidays etc ) and buy a house around 450-500K. You are investing into property by borrowing at low cost. Rent a room will pay the mortgage.
 
bish123 said:
and buy a house around 450-500K
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Why buy a more expensive house than you need?

I don't buy this argument of 'investing in property'. Very few people will ever realise the value of that investment by selling their home in future.

If you can buy your 'forever home' for 300k, IMHO spending 450-500 just doesn't make sense.
 
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